Deepening problems at Mexico's third-largest banking company could open the door to further expansion by U.S. banks, analysts and observers said Tuesday.

Grupo Financiero Serfin SA, which has been struggling with asset quality problems and low capital ratios, is negotiating with the Mexican government for a $1 billion infusion of capital, rating agencies and Mexican news reports said Tuesday.

Analysts said there is little danger that Serfin's woes, which date to the peso devaluation in 1994, will spread to other Mexican banks.

Serfin is unusual in having the highest concentration of any Mexican bank of non-tradable promissory notes that a former government deposit insurance agency issued in exchange for bad loans in the wake of the peso crisis. The yields on these notes are slated to decline on June 30, weakening Serfin's already-frail financial condition.

Spooked customers are likely to take their business to institutions perceived to be more stable, and that could be good news for U.S. banks, said Gary Kleiman, a senior partner at Kleiman International Consultants Inc., Washington.

"This has been a long-standing trend in Latin America-the flight to quality," Mr. Kleiman said. "All foreign banks would benefit."

A handful of U.S. companies are preparing to expand in Mexico to pursue growing businesses such as middle-market lending, private banking for the affluent, and consumer finance.

Thomson BankWatch, a New York ratings agency, said Serfin is the weakest of its Mexican peer banks. "It's been apparent for some time that the bank is in serious need of fresh capital," said Sabrina Rigau, an analyst at the agency.

Shares in Serfin stopped trading Friday amid the rumors. The bank said it was "evaluating several capitalization alternatives."

"Serfin's problems were the worst" of those at Mexican banks, said Roger Taillon, of Standard & Poor's Corp., which affirmed the banking company's double-B public information rating on Monday.

"This is not a situation where the whole system is on the brink of collapse," Mr. Taillon said.

Legislation recently passed in Mexico would allow foreign banks to acquire majority stakes in its three largest financial institutions, including Serfin.

Among potential buyers, HSBC Holdings Inc. is thought to be the likeliest candidate. It already has a 19.9% stake in Serfin, and analysts said the London banking company has long used such minority investments as springboards for outright acquisitions.

An HSBC spokesman declined to comment.

U.S. banks like BankBoston Corp. and Citigroup could also be potential bidders, analysts said.

BankBoston, which is in the middle of a plan to merge with hometown rival Fleet Financial Group, has indicated plans to beef up its presence in Mexico and hire 20 additional staff members there by yearend.

With nearly $18 billion of assets, 15% of Mexico's deposits, and 600 branches, Serfin could be considered attractive.

In an interview at an international banking conference last week, BankBoston president Henrique de Campos Meirelles said the bank would accelerate its expansion in Latin America once the merger with Fleet is completed. That deal is expected to close in the fourth quarter.

Mr. Meirelles said the merger would bring more capital that could be plowed into Latin American expansion.

A spokesman confirmed that BankBoston wants to expand its ability to offer niche corporate services in Mexico, such as cash management, trade finance, custody, and asset management.

Citigroup's Citibank unit has also been expanding in Mexico. Last year, it bought Banca Confia for $245 million, a deal that brought it corporate business and an important foothold in the country's consumer base, analysts said.

Whether the situation at Serfin creates opportunities for other U.S. banks with Latin American operations, including Bank of America Corp. and J.P. Morgan & Co., is less obvious, analysts said.

Before its merger with NationsBank Corp., "the old management at BankAmerica had an active interest in trying to do something" in Mexico, said Lawrence Cohn, an analyst at Ryan Beck & Co. "The new management has not made it clear."

Morgan, for its part, has scrapped plans to exercise options worth $65 million, to buy 8.8% of Serfin's shares, a source said.

A Morgan spokeswoman declined to comment.

Analysts said U.S. banks have catching up to do in Mexico, where the two largest banks hold 40% of all deposits.

"The impact of the foreign banks there is not as strong yet," said Laurence Madsen, a Latin American analyst at Warburg Dillon Reed.

Serfin's sale to a foreign bank may not materialize immediately, analysts said. Bidders would likely demand that the government take on the bank's troubled loan portfolio as part of its ongoing bailout of the Mexican banking industry.

"I think the government is looking to sell the bank but no one wants to touch it yet," Ms. Madsen said. "Whoever steps in will want an absolute guarantee that they won't have to deal with the credit problems."

Ms. Madsen added that signs that the government would intervene had sparked concern last week "that the problems are bigger than anyone thought. But people are coming around and realizing that that's not true.

"There may be smaller banks still out there with similar problems, but Serfin is by far the largest," she said.

A report to be issued today by Thomson BankWatch says: "It seems unlikely that HSBC will consider injecting new capital, at least until Serfin's asset quality problems have been resolved."

Analysts said the flight to quality has been delayed for now by Mexico's deposit insurance laws, which offer complete protection. Those laws are slowing being rolled back, analysts added.

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